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sufficient information to determine the value of Hudson‟s equity. The last piece of information we
need is Hudson‟s cost of capital, which we will assume is 12.0%, and we will use this as the required
return or discount rate for Hudson‟s cash flows to investors. Now we are able to calculate Hudson‟s
cash flows available to investors, terminal value, discounted total firm value, and value of common
equity. This calculation is performed in the valuation template and is presented in Exhibit 5.12.
Exhibit 5.11 Hudson Hybrid Car Company working capital and capital expenditures, 2008-2012
(in thousands of $).
This calculation of Hudson‟s value of equity follows the processes and steps discussed in this
section. The cost of capital, income tax rate, and perpetual growth rate for Hudson are all used in
determining firm value. EBIT times 1 minus the income tax rate is the after-tax earnings of the firm
available to investors, and Hudson‟s free cash flow is this after-tax earnings plus depreciation expense,
minus change in net working capital, and minus capital expenditures. The only complex calculation in
Exhibit 5.12 is Hudson‟s terminal value of $661,665,000 in year 2012, which is based on Hudson‟s
inputs and the terminal value formula:
Since Hudson becomes a constant and perpetual growth company in 2013, this value represents the
value of Hudson‟s cash flows to investors during the years 2013 and beyond, as of 2012. Adding this
terminal value as of 2012 to Hudson‟s yearly cash flows to investors produces total cash flows of
$7,953,000 in 2009, $15,374,000 in 2010, $12,826,000 in 2011, and $705,603,000 in 2012. When
these cash flows are discounted at Hudson‟s cost of capital, a total firm value of $476,909,000 results.
This is the value of the company to all investors, based on the cash flows available to all investors.
Exhibit 5.12 Hudson Hybrid Car Company calculation of value of equity, 2009-2012 (in
thousands of $).